While the latest surveys indicate that Millennials are becoming more serious about saving, most still do not have a detailed saving plan for retirement. According to a survey by Ramsey Solutions, only 38% of Millennials know how much money they need to retire, and 6 in 10 do not know how old they will be when they retire. Figuring out an effective Millennial savings plan could mean the difference between having enough for a comfortable retirement or ending up disastrously short on funds. To help bridge the knowledge gap, here some facts about saving for retirement that will help you develop an effective Millennial retirement savings plan
(Credit: Dave Ramsey)
1. Start saving now and save consistently.
Millennials are in the best position they will ever be in to save for retirement. Saving early and saving consistently will make a big difference in the amount of money you will have at 65. For example, if you assume a 7% annual return, someone who saves $5,000 annually between the ages of 25 and 35 will have more than $550, 000 at age 65. A person who invests $5,000 annually between the ages of 35 and 65 will end up investing 3 times as much yet will retire with barely more than $500,000. A Millennial who invests $5,000 annually from age 25 to 65 can retire with more than $1 million dollars by age 65.
(Credit: J.P. Morgan)
2. Establish saving milestones.
One of the keys to retirement planning for millennials is establishing saving milestones. While more Millennials are saving, without a retirement plan in place many still aren’t saving enough. That may be in large part because they are not sure how much they actually need to have saved at every age. Experts have established saving milestones that should be reached at certain ages. These recommendations include having 1x your salary saved by the time you reach 30, 2x by 35, 4-5x by age 55, leading up to having 10x your salary saved by age 65 to retire comfortably. Knowing these milestones can help Millennials stay on track to avoid unpleasant surprises later in life.
3. Max out your employer’s contribution.
72% of Millennials are already saving for retirement in a company-sponsored 401(k) or similar savings plan, but some are not getting the maximum benefit of the plans. Most employers who offer 401(k) plans provide some form of contribution matching (usually 5 - 7% of your salary), essentially giving you “free” money on top of your savings. Millennials need to make sure they are contributing enough to take full advantage of this benefit. If you opted for a lower deduction amount when you first enrolled, or were auto-enrolled in 401(k) plan as a new hire, you may be saving at a rate lower than your employer’s top match. Find out the amount of your employer’s contribution and make sure are getting the full amount.
4. Eliminate debt intelligently.
Millennials are suffering under more money-related stress than other generations, and much of it is related to debt. The average income for Millennials is just over $55,000, and the average debt load for Millennials is $30,580. This causes some to focus on clearing debt above all else, but that strategy could cost you in the long run.
(Credit: Dave Ramsey)
If you are wondering whether you should pay off your student loans and credit card debt instead of saving for retirement, the answer depends on the amount of interest you are paying versus the rate of return on savings. If your employer offers matching funds for retirement savings, that rate of return is hard to beat. Instead of throwing all your money into debt reduction, you would be better served by saving up to your employer’s contribution amount and putting the rest toward debt. Look into consolidating your debt into a lower interest loan, and focus on living within your means as part of your retirement savings plan for the future.
5. Self-employed? You can still save
The new “gig economy” is one of the factors that complicates retirement planning for millennials. A recent study by Upwork and The Freelancers Union found that almost one half of working Millennials do freelance work and one-third of Millennials are full-time freelancers. Gig workers don’t have access to a traditional 401(k), but you can still make tax-deductible savings contributions through a SEP IRA. If you are self-employed or freelance in addition to being a W-2 employee, you can contribute to a SEP IRA.
A SEP IRA is similar to a traditional IRA, but it has much higher contribution amounts - $54,000 in 2017, compared to $5,500 for a traditional IRA. There are pros and cons to this retirement account, so you should consult a retirement planning professional to see if this should be part of your savings plan.
Millennial retirement planning can be a hassle, but trying to save without a plan in place is a recipe for disaster. If you would like help creating an effective Millennial savings plan, reach out to financial advisor Matt Logan at www.MattLoganInc.com or call at 336-540-9700. We will help you set savings and investment goals, and develop an achievable plan that will enable you to start saving now to enjoy a comfortable retirement.